Chinese economy monitor: Note No 01 ---Suicides, Strikes & Wage Increases

By B.Raman

(June 10, Chennai, Sri Lanka Guardian) What will be the impact of the global financial and economic melt-down on the Chinese economy? This question should be of interest to the other countries of the South and South-East Asian region. If the Chinese economy is badly affected, they too are likely to feel the negative consequences of the down-turn in the Chinese economy. Keeping this in view, we have been bringing out a periodic “Chinese Economy Monitor” based on open source information. This is the eleventh in the series.)

ASSESSMENT

There are signs of concern among owners of foreign enterprises in China over the mushrooming strikes in some of their enterprises leading to wage increases. Low wages, high labour discipline and high productivity have been the secrets of China's economic miracle since 1978. This position has started changing. Workers are demanding higher wages and are prepared to go on strike for this. Though wages in China continue to be low as compared to other countries despite the wage increases, cost of production is expected to go up, resultng in Chinese exports becoming more expensive. Profit margins for foreign investors could decline. However, the Chinese authorities have till now not shown any sign of concern over the strikes and the mushrooming demand for wage increases. They seem to look upon higher wages as conducive to increasing the purchasing power of the people, thereby facilitating their goal of transforming the Chinese economy from an export-oriented to a consumption-oriented one.The economic crisis since 2008 has made them realise the risks of depending on cheap exports to keep the economic growth sustained. Since the crisis set in leading to the closure of a large number of manufacturing units, which were dependent on exports, they have embarked on a policy of restructuring the economy by developing the domestic market and stimulating the domestic demand. They look upon the current wave of wage increases as facilitating this process. Till now, the strikes for wage increases have been confined to the workers of foreign-owned enterprises. They have not affected those of the State-owned enterprises or the public servants. So long as the Chinese authorities manage to keep the strikes confined to foreign-owned enterprises, they may not face any problem in controlling the phenomenon, but if the strikes and demands for wage increases spread to State-owned enterprises and the Government services, the resulting situation could slip out of the control of the Government. The situation needs to be closely monitored. Another development of concern to the Chinese authorities is the economic crisis in the European Union countries (EU). The EU is the largest importer of Chinese goods. Though most of the contracts in the EU continue to be based on the US dollar and not the Euro, any weakening of the Euro as a result of the crisis could slow down the Chinese recovery and come in the way of their investing some of their foreign exchange reserves in EU instruments than in US Treasury Bonds. More investments in Euros as a safety option could be ruled out if it continues to weaken, leaving the Chinese with no other option but to depend on the US Treasury Bonds as at present.

SUICIDES, STRIKES & WAGE INCREASES

Many of China's big cities and coastal areas have raised local minimum wages and some foreign employers have given out substantive pay hikes. That, combined with an expected rise in China's currency, will squeeze exporters of clothing and other low-margin goods, possibly forcing thousands to close or move to cheaper countries. "It is very difficult for us," said Danny Lau, chairman of the Hong Kong Small and Medium Enterprises Association. He said some 2,000 to 3,000 of an estimated 50,000 Hong Kong-owned factories in southern China's Pearl River Delta, an export hub, might close. But putting more money in workers' pockets will help turn them into consumers and accelerate China's growth as a major market for imports. "This is good news. It's going to start driving consumer spending," said Standard Chartered economist Jinny Yan. Beijing and other Chinese cities have raised minimum wages by up to 20 percent as part of efforts to narrow a yawning income gap that China's leaders worry is fueling social tensions. It was the first rise since the minimum wage was frozen in 2008 to help exporters hold down prices amid the global crisis. Chinese authorities who normally bar independent labor activity have allowed workers to protest and sometimes carry out brief strikes to demand higher wages. The Taiwanese-owned Foxconn Technology Group has announced the second in a series of raises that would increase pay by up to 65 percent at its factories in Shenzhen. The company employs 400,000 people there making electronics including Apple, Nokia and Sony products. The wage hikes fit Beijing's economic strategy, which calls for encouraging China's own consumers to spend more in order to reduce reliance on exports and investment to drive growth. The Government is also trying to shift more money down the economic ladder to defuse public anger that Chinese workers have gotten too little out of a boom that has created dozens of billionaires. Wages as a share of China's gross domestic product have fallen steadily since the 1980s, from 56.5 percent in 1983 to 36.7 percent in 2005, according to figures from the All-China Federation of Trade Unions. Even at that level, rising incomes made China the biggest auto market last year by vehicles sold and a leading market in industries from air travel to fast food. Retail sales in April, 2010, were up 18.5 percent from a year earlier. "Demand is picking up because people have more money in their pockets," said Jing Ulrich, JP Morgan's chairwoman for China equities. She said higher wages could boost demand for products as varied as fast food and sporting goods. Foreign companies' focus on China as a market was highlighted by a survey released in April, 2010, by the American Chamber of Commerce in China. It found the top priority for 58 percent of its member companies was producing in China for sale to local consumers. Only 14 percent said their priority was to produce for export.The wage hikes are likely to hit employers hardest in China's southeast. The area has thousands of factories, many owned by Hong Kong or Taiwanese investors that compete in global markets. Many have razor-thin profit margins and little power to pass on higher costs to customers. The region was battered in 2008 by the collapse in global consumer spending. Thousands of factories closed and the Government said as many as 30 million people were thrown out of work. Even after the latest increases, Chinese wages are still a fraction of those in the United States or Europe. Foxconn’s pay for its employees in Shenzhen will be about 2,000 yuan ($293) a month. "We don't see an end to an era of cheap Chinese goods," said Yan of Standard Chartered. The minimum wage hikes should raise growth in domestic consumption by about 0.2 percentage points this year, according to Jun Ma, chief China economist for Deutsche Bank. He said that would come at the cost of a 0.4 percentage point rise in inflation and a 0.6 percentage point decline in exports. The wage hikes "will serve as an important impetus to speed up the income distribution reform and economy upgrading," Ma said.---- Xinhua of June 9, 2010.

HONDA, CHINA FACES LABOUR UNREST

2.Japanese carmaker Honda Motor Co faced a new walkout at one of its parts suppliers in South China, just days after resolving a strike that froze car production at four factories. The strike by some workers at Foshan Fengfu Autoparts Co in Foshan of Guangdong province began at the first shift on June 7, said company spokesman Keitaru Yamamoto. Yamamoto, who is based in Tokyo, said the company is still trying to confirm how many workers are involved in the strike and why they walked off the job. The company is also studying what impact the walkout might have on production, he said. The strike came just days after Honda resumed production following a two-week strike at a wholly owned parts plant. That dispute was resolved and workers returned to work on June 4 after a wage deal was reached, Honda officials said. Meanwhile on June 7 in Kunshan of East China's Jiangsu province, about 2,000 assembly line workers in a Taiwan-funded machinery factory went on strike to ask for better pay and improved working conditions. Some 50 workers were reportedly injured, five seriously, in a clash between the workers and local security staff who tried to stop workers from protesting in the street. A female human resource official surnamed Dong, with KOK Machinery, confirmed the incident to China Daily but refused to give details. Another anonymous official with the company said the factory owner had flown to the factory from Taiwan on June 7 night to deal with the walkout. The latest strikes reflect rising tension between workers and companies, especially those from overseas, that treat China as a source of cheap labor. The growing labor unrest originating in South China may make wage hikes a trend in the near future, but it might be an opportunity to push local manufacturers to update industry and promote production efficiency, experts said. "Suicide-plagued Foxconn and strike-bothered Honda resolved their problems by increasing workers' wages. Their methods may set a model for other enterprises facing the same problem," said Wang Shaoqing, deputy General-Secretary of Shenzhen Association of Arts and Crafts Industry. The Pearl River Delta region in Guangdong province is a major manufacturing base in the world, where tens of millions of migrant workers from the country's hinterlands churn out goods for top global companies and export-oriented local small- and medium-sized manufacturers. Zeng Li, an official from the Dongguan branch of the Federation of Hong Kong Industries, said the profit margin for Hong Kong companies in Dongguan is between 10 to 20 percent. "If labor costs increase, their profit will fall and they may even shift their factories to other countries that can provide cheaper labor," Zeng said. Some Hong Kong businessmen are considering moving their business to Southeast Asian countries such as Vietnam, due to the rising pressure of higher labor cost in China, he said. But Wang, from Shenzhen Association of Arts and Crafts Industry, said a massive move of overseas companies from the Chinese mainland to other countries is unlikely. "Although some other neighboring countries offer cheaper labor, their political and business environments are not as good as China's," he said. "In addition, the 'Made in China' label has already won recognition in the world market." Wage hikes are an unavoidable trend, Wang said. Zhang Yansheng, director of the Institute of Foreign Trade of the National Development and Reform Commission, said China's advantage of cheap labor may disappear in 10 years. Some companies already have found difficulty in hiring migrant workers because their wages are too low.------China Daily of June 9,2010

FOXCONN OF TAIWAN FACES DIFFICULTIES IN ITS CHINA FACTORIES

3. Protesters picketed Foxconn's annual general meeting in Hong Kong on June 8,2010, accusing the computer giant that services companies like Apple Inc of poor corporate ethics after a recent spate of suicides at Foxconn factories on the mainland. The 30 demonstrators held signs saying, "Workers are not machines. They have self-esteem," outside a hotel function room where shareholders of Hong Kong-listed Foxconn International Holdings Ltd were meeting. They also targeted Apple Inc, waving a cardboard cutout of Chief Executive Steve Jobs with devil's horns, and another placard featuring the company logo and the words "Bloody Apple". Eleven workers killed themselves and three attempted suicide at Foxconn's operations in China this year, mainly workers who jumped from buildings. Protesters also laid white flowers at an Apple retail store in a tribute to the dead workers. Organizer Debby Chan accused Foxconn of poor management, urging the Taiwanese manufacturer of iPhones to raise wages and let workers set up an independent union. Foxconn, the world's largest contract maker of electronics, has announced two pay raises for their Chinese workers after the recent suicides. Hong Kong-based securities analysts and economists said the two salary hikes in just one week would increase its operating costs and would have an impact against its annual financial results in 2010, and of course, its share price. Macquarie Group, an international financial company, said in a note that Foxconn took the market by surprise when it announced two salary hikes in one week, which is expected to significantly impact Foxconn's profits this year. At the same time, Foxconn said it will seek higher prices from its clients to help offset wage hikes. Meeting shareholders in Hong Kong for the first time since the deaths, executives at Foxconn, owned by Taiwan's Hon Hai Precision Industry, said the company hoped to reach a consensus with customers this month.-------China Daily of June 9,2010

4.Foxconn International, the HK-listed arm of the Taiwan-based electronics giant Hon Hai Precision Industry, said on June 8,2010, that it has started talks with overseas clients over a possible product price rise, which could partly offset rising operating cost following two salary hikes in the Chinese mainland. Foxconn International Chairman and CEO, Samuel Chin Wai Leung, told reporters after an annual shareholders' meeting that the two salary hikes were expected to have a short-term impact on the company's profits though Foxconn was currently unable to evaluate the real impact in quantity. In a statement filed with the Hong Kong stock exchange on June 7,2010,, Foxconn said it had approved a proposal "to further increase the level of salaries and wages payable by the Company to its staff engaged on its production lines in the Shenzhen area". The base salaries and wages of workers, leaders and supervisors in Foxconn's Shenzhen factory would be further adjusted from 1,200 yuan ($176) to 2,000 yuan per month subject to completion of a three-month work performance assessment by Foxconn, said the statement. For employees in other parts of the Chinese mainland, Foxconn will review whether any further adjustment is to be made to the wages and salaries of those employees based on local living standards and relevant regulatory requirements, it added. The salary hike would take effect on October 1 this year. It was the second time in one week that Foxconn announced a salary hike. On May 26,2010,, it had announced a 30-percent pay increase for workers at its Shenzhen plants starting from June 1 for what it claimed were "rising consumer prices and living costs and its corporate performance." The pay rises came after 10 workers killed themselves and three attempted suicides at Shenzhen base this year. Foxconn has some 420,000 employees in the Chinese mainland, with 300,000 in Shenzhen's plant alone. Foxconn International also said in its statement that it was unable to determine the impact of the latest salary hike on its financial results in 2010 "because the increase in the operating costs of the Company as a result of the wage and salary increase is just one of the factors that may have an impact on the Company's operating results. There are other factors which may help mitigate or offset such increase in operating costs, such as increase in revenue or reduction in other operating costs," it said.----Xinhua of June 9,2010

EU’S SHADOW ON CHINESE ECONOMY

5.The European debt crisis and the plummeting euro are taking a toll in China, as a rapidly strengthening Chinese yuan has eroded the competitiveness of its goods in Europe, the country's largest overseas market. Insiders also said that the dwindling exports to countries like Germany, France and others in Europe will complicate Beijing's move to re-launch currency exchange rate reform, namely, breaking the yuan's peg to the U.S. dollar. And, spreading debt problems in Europe will definitely impact the budding economic recovery worldwide, and compromise China's decision to exit from proactive fiscal stimulus and loose monetary policies. China's Ministry of Commerce has lately revealed its warnings that a weaker euro has wrecked Chinese exports and hurt Chinese job market prospect.

"The yuan has risen about 14.5 percent against the euro during the last four months, which will increase cost pressure for Chinese exporters and also have a negative impact on China's exports to European countries," Yao Jian, the Ministry's spokesman, said at a news conference in Beijing. Beijing has been under pressure from Washington and others to resume appreciating the yuan against the dollar, which it halted in 2008 amid a worsening global economic crisis. Entering 2010, China's foreign trade and economic growth had both picked up. However, the sudden bailout of Greece's indebted government by other European countries has cast a shadow on China's decision to move. In the light of the euro's 14.5 percent drop in value against the yuan, letting the yuan rise against the dollar would also mean a further increase in the yuan's value against the euro, creating even more problems for Chinese exports to Europe. Addressing the annual China-US Strategic and Economic Dialogue on May 24 in Beijing, President Hu Jintao said that China will continue to steadily advance the reform of the formation of the yuan exchange rate mechanism. Hu's words sent a clear message that Beijing is considering reforming the yuan seriously, but the theatrical arrival of the Europe crisis has just complicated its decision. Now, some experts predict that China probably would allow the yuan to rise against the dollar later this year. Some Chinese companies are already running into difficulty because of the euro's fall against the renminbi. "We have been receiving calls from some European clients who signed contracts with us earlier this month, and they all want to cancel their orders, since the depreciation of the euro has eroded all their margins," said Elvin Xu, the sales manager of Guangdong Ouyi Electrical Appliance in Zhongshan, Guangdong Province, which makes gas stoves, heaters and water heaters. The euro's difficulties have also inflicted tens of billions of dollars in losses on the value of China's US$2.4 trillion worth in foreign exchange reserves, analysts say. China had been trying to limit its dependence on U.S. Treasury securities for those reserves in recent years, fearing that the United States might someday suffer from budgetary problems or inflation, and did so by expanding its holdings of European government bonds. Now as the euro tumbles, so does China's reserve value.----People's Daily of May 25, 2010

6. A nearly $1 trillion rescue package to prevent the Greek sovereign debt crisis spreading in Europe will impact on various facets of the Chinese economy, analysts have said. "The rescue package will help the markets regain confidence and alleviate panic about not only the Greek economy, but also other European economies," said Zhang Xiaoji, senior economist with the State Council's Development Research Center. But other Chinese analysts said the country faces uncertainties in its overseas financial portfolio, exports, currency policy and exit from the economic stimulus package.-----Xinhua of May 11,2010

7.Premier Wen Jiabao told Spanish Prime Minister Jose Luis Rodriguez Zapatero over phone on May 10 that China supported action to help Greece overcome its sovereign debt crisis. Spain currently holds the rotating presidency of the EU. Mr. Wen urged countries to coordinate economic policymaking, reform the international financial governance structure, maintain stability of currencies and prevent protectionism. But it is too early to suggest the European situation has stabilized, said Yu Yongding, head of the China Society of World Economics. "The Greek crisis fully exposed the weakness of the global economic recovery," Yu, a former member of the central bank's monetary policy committee, told China Daily. "It is hard to predict what will happen next." The euro will probably remain weak, Yu said, while the dollar will strengthen. "It will pose a challenge for China's policymakers, who want to diversify the country's overseas financial portfolio," he said. China has spent the bulk of its foreign exchange reserves on dollar-denominated assets, such as US treasury bonds. It has been pondering diversifying the structure of investment. "But now it is clear that the euro also has risks," Yu said. "It would complicate China's policymaking." China's exports are set to suffer, Yu said, since the crisis would be a drag on the growth of Europe, China's largest trade partner. "Growth is no longer the top priority for crisis-hit countries; they have to first repay their debt and convince investors they are capable of doing that." The impact on China's exports, however, could be limited, said Zhang at the State Council's Development Research Center. "The weakened euro will affect trade settled in euros, but the majority of China's trade with European countries is settled in US dollars," he said, adding that China's previously announced export target of 10 percent year-on-year growth for this year should not necessarily be changed. One outcome of the European crisis is that China is facing less pressure for the yuan's revaluation as the US dollar is rising. But the dollar's rise could damage US exports, which US President Barack Obama wants to double in five years. "Therefore, the US could press harder for the yuan's appreciation to benefit its export sector," Yu said. China will "improve the yuan's exchange-rate formation mechanism", but the yuan would remain "basically stable", the People's Bank of China said in a quarterly report on May 10. Yu also said China's current monetary policy, which is tightening, should not be changed despite the external uncertainties brought about by the European crisis. "We should not rush to change it given the excessive money supply growth and high asset prices." By doing that, he said China's economic growth rate should slow this year. China International Capital Corporation cut its forecast of China's year-on-year growth for this year to 9.5 percent from 10.5 percent in its report released on May 10, citing the country's tightening measures and external uncertainties caused by the Greek crisis. China's central bank warned on May 10 the European debt crisis might pose a challenge to the world economy and that China faces rising inflationary pressure. Europe's debt crisis, which affected directly economic growth in the Euro zone, had created major uncertainties for the global economic recovery and led to a chain reaction and posed a systemic risk to the world economy, said the quarterly monetary policy report published on the People's Bank of China website. It also warned of increasing price pressures for China due to rising commodity and labor costs and ample liquidity in the global market. "The potential threat to price stability is increasing", the report said. However, the report said China's economic recovery was further consolidated, and that urbanization and improved consumption were expected to be the new momentum to push the economic growth. The central bank would keep its moderately easy monetary policy and strengthen flexibility to changing circumstances, and it would intensify management of liquidity, said the report.----- Xinhua and China Daily of May 11,2010

HOLDINGS OF US TREASURY BONDS UP

8.China has boosted its holdings of US Treasury debt for the first time in six months. That development could ease concerns that lagging foreign demand will force the US government to pay higher interest rates to finance its debt. The US Treasury Department reported on May 18 that China's holdings of US Treasury securities rose 2 percent to $895.2 billion in March , the first increase since last September. Total foreign holdings of Treasury securities rose 3.5 percent to $3.88 trillion. The government reported that net holdings of long-term securities, which includes the debt of US companies as well as government debt, rose $140.5 billion in March, the largest one-month gain on record. It surpassed the old record of a net increase of $135.8 billion in May 2007. The big increase was influenced by two factors: a flight to safety by investors increasingly worried about the debt crisis in Europe; and a rebounding US economy which has sparked greater interest by foreigners in purchasing US corporate debt. Investors have grown nervous about the ability of Greece and other heavily indebted nations to repay their debt. European nations and the International Monetary Fund assembled a nearly $1 trillion support package to convince investors that their bond holdings are safe. But markets have remained nervous. Gregory Daco, an economist at IHS Global Insight, said as the Greek debt crisis began to intensify in March, foreign investors sought refuge in the safety of US Treasury bonds and notes. He said the rebound in the US economy was also helping to attract investors to bonds issued by US companies. The overall US economy, as measured by the gross domestic product, grew at an annual rate of 3.2 percent in the first three months of this year. It was bolstered by the strongest gain in consumer spending in three years. "The strong first quarter real GDP and productivity growth as well as the recent surge in the dollar should continue to draw in foreign investment," Draco predicted. Win Thin, senior currency strategist at Brown Brothers Harriman & Co. in New York, said he expected investors to continue to favor dollar-denominated assets over holdings in the euro, the common currency of 16 European countries including Greece. "Given the debt crisis that Europe is struggling with, flight to safety will most likely favor the United States in quarter two," Thin said. "Really, would any reserve manager be moving aggressively into euros this past few months?" Net purchases of long-term US debt had increased $47.1 billion in February after an increase of $15 billion in January. Those gains were seen as a good sign that foreigners continue to be interested in US debt securities even in a period when Treasury debt has soared. China is the largest foreign holder of US Treasury securities. The $17.7 billion increase in March left its holdings at the highest level since November. Japan, the No. 2 foreign holder of Treasury securities, also increased its holdings in March. It raised them 2.1 percent to $784.9 billion.-----China Daily of May 18,2010

EARLY YUAN REVALUATION UNLIKELY

9.Worried about a depleting trade surplus and a possible slowdown of its economy later this year, China is not likely to accelerate the pace to revalue its currency, the yuan, experts have stated.The Beijing-based China Daily has reported that the chances of an early revaluation of the renminbi look unlikely and could happen much later than expected, considering that the nation's trade surplus may see steep erosions due to the European debt crisis and the growing trade protectionist measures against China. Both Chinese and foreign press had predicted that Beijing will allow the yuan to rise against the U.S. dollar sometime in the second quarter this year. Some had even estimated that a revaluation might materialize in May.Economists now consider such a move unlikely and expect any currency moves to be deferred till the end of the year with a smaller range and overall gains of 2 to 3 percent, the China Daily report said.Ministry of Commerce officials had on May 17 indicated that the prospects for the nation's exports were not that hopeful this year and the annual trade surplus may see a big drop. "The improved trade balance will lay a good foundation for China to implement its macro-economic policy and the currency issue should not be too politicized," said ministry spokesman Yao Jian. "The growth in imports will, however, far exceed that of exports due to the surging prices for imported goods, and hence the large decline in the trade surplus will not be such a big concern," said Dong Xian'an, a chief economist at Industrial Securities Shanghai. Dong expects the trade surplus this year to drop by 30 percent to US$137 billion, compared with US$196 billion in 2009. For example, in March China posted a trade deficit of US$7.24 billion, the first deficit in the past 70 months. From January to April, trade surplus plummeted by 79 percent. "The monthly figures will hover near the balance point," said Yao."The sharp fall (in the trade surplus) is unavoidable. There are no signs of any improvement in exports as the European debt crisis is casting shadow on economic growth," said Yan Jinny, an economist with Standard Chartered Shanghai. Yan feels that the market has lowered its expectations of a currency revaluation as the European debt crisis has hurt the region's economic growth and marred prospects for Chinese exporters. "The appreciation will not happen until there are clear signs that the European debt contagion has stopped spreading," Yan said. According to Yan, even if the revaluation happens, the rise would be around two percentage points, the upper limit for the next 12 months.----- People's Daily of May 19,2010

CURRENT ACCOUNT SURPLUS DOWN

10. In the first quarter of 2010, China's current account surplus totaled 40.9 billion U.S. dollars, 48 percent lower than the previous year, according to data released by the State Administration of Foreign Exchange (SAFE).This is the first time that the SAFE has released quarterly data of China's international payments. Both China's current account and capital and financial account recorded surplus, with international reserve assets continuing to grow. In the first quarter of 2010, China's current account surplus dropped 48 percent year on year to 40.9 billion U.S. dollars, including 29.4 billion U.S. dollars of surplus in goods trade, 18 billion U.S. dollars of deficit in services trade, 21.3 billion U.S. dollars of income surplus and 8.3 billion U.S. dollars of current transfer surplus. During the same period, China's capital and financial account (including net errors and omissions) realized 55.0 billion U.S. dollars of surplus, 17.5 billion U.S. dollars of which are from direct investment.---Xinhua of May 14,2010

FDI IN SERVICES UP, IN MANUFACTURING DOWN

11. The Ministry of Commerce said on its website on May 14 that China's FDI in April,2010, grew by 24.7 percent from a year earlier to hit $7.35 billion. From January to April, China attracted investment worth $30.8 billion, up 11.3 percent year-on-year. April is the ninth consecutive month that China has recorded monthly growth in FDI. "The strong growth, even higher than the previous month, shows the government's measures to create a more business-friendly environment for the FDI are working nicely," said Wang Zhile, director of the research center on transnational corporations under the Ministry of Commerce. "As China's economic power grows amid the global recovery, not only as a large exporter but also a potentially huge consumer, the nation will have more foreign investment continuously piling in, and the nation is and will continue to be a much more attractive destination for FDI," he added. Responding to increasing complaints from foreign enterprises on the deteriorating environment in the wake of the Google and Rio Tinto cases, the State Council in early April announced new measures including preferential policies for land use and tax, encouraging investment into renewable energy, high-technology and service industries, and moves into central and western China. A key measure allows local authorities to approve foreign projects up to $300 million, compared with a previous cap of $100 million. As part of the coordinated measures of the State Council policy, the State Administration for Industry and Commerce on May 13 released guidelines for further development of the FDI, and Vice-Minister of Commerce Ma Xiuhong also said the Ministry is discussing detailed measures tailored for foreign businesses. During the first quarter, China's gross domestic product grew 11.9 percent, the fastest pace in three years. China is widely expected to pass Japan as the world's second largest economy this year, despite concerns economic growth may slow in the second half. Volkswagen AG, the world's second largest auto maker, said in late April it would add another 1.6 billion euros ($2 billion) to establish another two factories in China, while American and European markets are still sluggish. On May 12, Molson Coors, the world's fifth-largest brewer, agreed to pay $40 million for a 51 percent stake in a new joint venture in China, in a bid to cash in on the growing beer consumption market. "It's too early to make a conclusion that the April growth is mainly attributable to government policies," said Yan Jinny, an economist from the Standard Chartered Shanghai. "Foreign businesses' enthusiasm was not dampened by the occurrence of individual negative cases in China." In the first quarter, China's FDI in the service sector rose by 25.4 percent to $10.6 billion, while the manufacturing sector dropped 10.3 percent. The service industry accounted for 45 percent of the investment, said the Ministry of Commerce.----China Daily of May 15,2010

EXPORTS: CAUTIOUS OUTLOOK

12.Chinese Commerce Minister Chen Deming said he remained cautious about growth of exports this year as recovery in demand for China-made goods in the United States and Europe was still very slow. China's exports were on track for recovery, but it was hard for the growth to reach pre-financial crisis levels this year due to uncertainties on the global market. ”A majority of exporters reported growth in orders from overseas customers," he said. Chen, however, warned against blind optimism about trade recovery.The growth in orders came mainly after overseas customers sought to replenish their stocks amid worries that trade protectionism would hurt global trade in the second half of this year.The number of total overseas customers had grown this year, but those from the US and Europe were fewer. The recovery in demand in major markets like the US and Europe remained very slow, a sign that global demand had not recovered to pre-crisis levels. "Chinese exports are expected to achieve better results than last year, but the growth pace won't be very fast," he said. Chen added that Chinese exporters were urged to speed up the transformation of the growth pattern and adjust products structure for more healthy growth. China's exports rose 28.7 percent year-on-year in the first quarter of 2010 after declining 16 percent last year amid the global economic downturn, according to the General Administration of Customs. The People's Bank of China, the central bank, said in a report that an increase in orders would push up export growth to more than 20 percent in the second quarter. The report said China still faced deteriorating trade conditions with rising trade protectionism and the unstable global economic recovery.----Xinhua of April 24, 2010

TRADE SURPLUS NOSEDIVES

13.China's trade surplus nosedived 87 percent from a year earlier to $1.68 billion in April, a drop analysts said will ease the pressure on revaluation of the yuan. Exports surged 31 percent to $119.9 billion while imports soared 50 percent to $118.2 billion. Total trade volume grew 39 percent to $238.2 billion. March saw a trade deficit of $7.24 billion, the first monthly deficit in the past six years. The trade surplus will continue to narrow in the months ahead due to weak overseas demand, analysts predicted. "We are highly likely to see trade deficits for May and June because domestic demand will stimulate import growth while global uncertainties, such as the Europe debt crisis, will weaken overseas demand," said Liu Wei, president of the School of Economics at Peking University. The trend is "good for the stability of China's foreign exchange policy in the short term and will alleviate the pressure to appreciate the yuan", he added. The Ministry of Commerce said recently that the foreign trade picture will not be very rosy this year because of rising raw material costs, mounting trade protectionism and a grim outlook for global markets. Yan Jinny, economist at Standard Chartered Shanghai, said the sovereign-debt crisis in Europe, where one-fifth of Chinese exports go, helped ease the pressure on the yuan. "If not for the Greek fallout, China would have been under bigger pressure," Yan said.But the pressure will mount after Chinese exports turn robust later this year, analysts said. Exports will see a rebound but import growth will sag when demand for commodities and infrastructure materials decreases in the third quarter, Yan said. Dong Xian'an, chief economist at Industrial Securities, said the Greek debt crisis is not likely to spread to the whole continent and EU demand for Chinese goods will perk up in the second half. That will be the time for China to appreciate its currency, which the United States and some other countries believe is undervalued, both Yan and Dong said. Chinese exporters are now focusing more on the domestic market to avoid being hit by the appreciation. "If the yuan rises 3 percent, we would reap no profit," said Zheng Rixiao, general manager of Yawin Mechanical and Electrical Equipment Import and Export, an exporter based in Fujian province. However, currency appreciation "is a matter of time, so we have shifted focus to creating high value-added products", he said.------- China Daily of May 11, 2010

REAL ESTATE SALES DECLINE

14.China's property prices will stabilize in the second quarter of this year due to the government's tightening of real estate policies and attempt to improve imbalances between supply and demand, industry experts said at a forum on May 10."In cities that have experienced excessive property price growth, there will be bigger fluctuations in the following three months, but the decrease will differ from city to city," said Nie Meisheng, president of China Real Estate Chamber of Commerce. However, experts are worried that tightening policies may deter property developers from starting new projects and purchasing land, thereby cutting the supply and pushing up prices next year. Both central and local governments have launched a string of measures to curb soaring property prices and investment-oriented home purchases, such as raising down-payments and mortgage rates for second and third homes, and even restricting the number of apartments a family can purchase. Those measures instantly chilled the property market in key cities, with transactions and prices falling. Statistics from the China Index Academy show that among the 35 major cities it monitors, 26 cities saw transactions dip , with an average fall of more than 20 percent. The average price of home deals in the southern city of Shenzhen was 19,271 yuan ($2,823) per square meter, down 25.44 percent from the previous week, leading to the biggest drop among 35 cities. Beijing was down 18 percent to 15,707 yuan per sq m, and Shanghai was down 12.2 percent to 13,246 yuan per sq m. Hangzhou, capital of East China's Zhejiang province, however, reported a 49.2 percent increase in transactions and 25 percent growth in price, with the average price reaching 25,409 yuan last week. Ma Ji, consulting manager at Shanghai Centaline China, said the situation in May looks dimmer, as up to 60 percent of their divisions in Shanghai have reached no deals over the past 10 days. "We still need another two to three months to watch those policies' exact impact on China's property markets. And we should keep a close eye on the land transactions and prices to evaluate property developers' next moves," Nie said. According to RIECO, a real estate research institute, property investment grew 35.1 percent in the first quarter and the growth rate is up 15 percentage points over the previous quarter. The floor space of newly- started residential projects also jumped by 60.8 percent in the first three months of this year. "If property developers deter construction or stop buying land to save cash for market uncertainties in the second half of 2010, then the market supply for 2011 will largely shrink, worsening the already poor supply-and-demand relations," said Ren Zhiqiang, chairman of Huayuan Property. In Beijing, for instance, only around 40,000 apartments are currently available for sale, much lower than the typical 100,000 units for sale, he said.------China Daily of May 11,2010

15.Property sales in Beijing, Shanghai and Shenzhen dropped in May, with house prices declining as well, the Economic Information Daily reported on June 8, citing data from a real estate brokerage. Sales volume of new properties in Beijing in May fell by 50 percent from the previous month to 9,639 units, while the number of properties resold hit 14,501, a decrease of 58.5 percent, according to the real estate brokerage. Sales volume of the city's new residential properties fell by 47.8 percent to 6,360 units in May, while the number of homes resold dropped 58.8 percent to 13,545 units. Shanghai witnessed its secondhand home transactions dive 69 percent from April, and decrease in this sector in Shenzhen was 24.1 percent month-on-month.Meanwhile, statistics from China Index Academy show that among the cities it tracks, 29 met a decline from April, and house prices fell in most of the cities, with Beijing and Shanghai declining more than 10 percent.---China Daily of June 8,2010

AUTO SALES CONTNUE TO GROW, BUT LESS RAPIDLY

16.April, 2010, passenger vehicle sales grew 33 percent over last year, the lowest rate during the past 12 months. China sold 1,064,545 cars, multi-purpose vehicles, sports-utility vehicles and minivans in April, up 32.7 percent from a year earlier, however, down 7.3 percent from March, said China Passenger Car Association.This compares to a 63 percent year-on-year growth rate in March and 111 percent in January. However, China's passenger vehicle sales in the first four months reported brisk growth of 52 percent over a year earlier.Total automobile sales growth also slowed to 34 percent in April, with 1.56 million vehicles sold, but still much higher than the US figures. Rao Da, Secretary-General of the China Passenger Car Association, said that the sales decrease was expected, denying rumors that China's vehicle market is at a turning point. "China's passenger vehicle market is still developing steadily," said Rao, who insisted that more than 17 million automobiles will be sold nationwide this year - almost 25 percent more than last year. In 2009, automobile sales surged 46 percent to 13.6 million units helped by a series of government stimulus measures, helping China overtake the United States to be the world's biggest auto market. According to statistics released by the association, in the first four months China produced 4.57 million passenger vehicles, 257,000 units more than sold in the same period. The high inventory and weakening consumption enthusiasm amid increasing car usage costs make it difficult to have an optimistic expectation for China's vehicle sales in the second half.----- China Daily of May 11,2010

DEMAND FOR LUXURY GOODS UP

17.China will rank as the world's biggest market for luxury goods in five years, a blue paper on China's commercial development from 2009 to 2010 released in Beijing on May 19 said. Released by the Chinese Academy of Social Sciences, the blue paper said China's luxury goods market had increased to 9.4 billion U.S. dollars by the end of 2009, accounting for 27.5 percent of the world's luxury goods market and emerging as the world's second largest luxury goods market. In five years, the market for luxury goods in China will reach 14.6 billion U.S. dollars, becoming the largest in the world, the paper predicted. The paper said most luxury goods makers have opened outlets in Chinese metropolises and provincial capital cities. With increased competition, however, some of the makers have opened outlets in smaller cities, too. The paper quoted a Mckinsey & Company report as saying rich consumers in China are generally younger than those in other countries, although it gave no definition for such a consumer. The report found 80 percent of China's rich consumers are under the age of 45, while only 30 percent of such consumers in the U.S. and 19 percent in Japan are under 45. The paper quoted a report for 2009 as saying the average age of people with personal wealth over 100 million yuan is 43 in China and those with wealth over 10 million yuan is 39. In addition, the paper said young people born in the 1980s, especially those with wealthy parents, have a better awareness of luxury goods and are more likely to buy them. --------Xinhua of May 20, 2010

TIBET AIRLINES

18.Tibet Airlines, the first carrier based in southwest China's Tibet Autonomous Region, will start flight operations in the middle of next year and is recruiting employees now, China Business News reported on June 8. The founding of Tibet Airlines was approved by the Civil Aviation Administration of China (CAAC) in March with a registered capital of 280 million yuan ($41.1 million). State-owned Tibet Investment Co holds 51 percent of the carrier while two Lhasa-based investment companies Sanli and Ruiyi own 39 percent and 10 percent respectively. A source, who did not give his name, told China Business News both Sanli and Ruiyi are privately-owned companies and Tibet Airlines would like to cooperate with other carriers. Currently, Air China has 55-60 percent share of Tibet's aviation market. Sichuan Airlines owns about 30 percent while other carriers including China Southern and China Eastern have 10 to 15 percent. Deep discount airline tickets are rarely seen on Tibet flight routes as the region is becoming a popular tourist destination. The report said Tibet Airlines is choosing between Boeing 737-700 and Airbus A319 to build its fleet due to the high altitude of Tibet's airports. The airline will introduce three aircraft at first. The carrier will operate flights within the Tibet Autonomous Region and link the region's capital Lhasa with other major cities around the country. The newspaper also said the airline hopes to serve international destinations in the future. The booming tourism will no doubt create a good opportunity for the region to develop its aviation industry. "It may cost eight hours for tourists to drive from Lhasa to Nyingchi prefecture, which is just 300 kilometers away from the regional capital. The inconvenient road traffic makes Tibet receive fewer tourists than it could be," the above-mentioned source told the newspaper. "Compared to building highways and high speed railways, developing the aviation market in Tibet will be a better choice economically," he added.----China Daily of June 8 ,2010 (9-6-10)

(The writer is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai, and Associate of the Chennai Centre For China Studies. E-mail: seventyone2@gmail.com )